Power to the People

If you want to see how stark raving mad the Left has become, check out this analysis of the power outage in the DC area, and especially Pepco’s perennial sluggishness in restoring power after outages in parts of DC and the Maryland suburbs (always days behind Dominion Power in Virginia): it’s all the fault of Republicans, you see, for favoring the introduction of competition to electricity markets (which never really happened in Maryland). This summary is especially clueless:

So, to recap, we have have a government-subsidized, untaxed, virtually unregulated, corporate monopoly (rather than a city utility) that has no real incentive to reduce outages or downtime, because (a) there’s nowhere else for its customers to go for electricity, and (b) they get paid whether they’re supplying us with power or not.

And just who was it who created the business model of a government-supervised monopoly? Oh yeah, that’s right—liberals (or the original “Progressives” if you prefer).

A key phrase in the passage above is “no real incentive to reduce outages or downtime.” “No real incentive” applies to most government sanctioned monopolies, like the DMV, the TSA, and the public schools. Economist Arnold Kling has an answer: break up Pepco, and allow tiered reliability pricing and outage reinsurance—in other words, some real competition and market incentives.

It might be interesting to combine the approaches of tiered pricing and competition. For example, if the indemnity rate is set on the basis of Pepco’s past performance, a competitor might calculate that it can earn a profit by swooping in and taking over maintenance. If the competitor is more reliable, it will enjoy the reliability premiums from tier-one customers without having the indemnity costs that Pepco would suffer.

I hope that readers understand that I am not proposing these as ideal solutions to the problem of electricity reliability regulation. The main point is that we should appreciate the economics of the situation. First, regulation is inferior to market competition as a force for driving improvements in quality. Second, when there is no market price for something of value (in this case, reliability), incentives are bound to be misaligned.